1. Apple Corporation Sample Accounts Receivable Subsidiary Ledger
Total Due
Acme $ 10,000
Baxter ,000
Jones ,000
Martin ,000
Smith ,000
$100,000
Gross Accounts
Receivable
LO1

2. Credit Sales Slows inflow of cash Risk of uncollectible accounts
Terms: 2/10,
net 30
Sales Invoice
Trade Credit
Retail Customer
Receivables

3. Accounting for Bad Debts: Direct Write-off Method
Future period charged
with expense of bad debt
write-off
Period of sale
Journal entry to record write-off in period determined
to be uncollectible:
Bad Debts Expense XXX
Accounts Receivable—Dexter XXX

4. Accounting for Bad Debts: Allowance Method
Period of sale
Estimated bad debt expense (and allowance account) recorded in the same period

5. Accounting for Bad Debts: Allowance Method
I estimate...
Accounting for Bad Debts: Allowance Method
Journal entry to record estimated bad debt
expense in period of sale:
Bad Debts Expense XXX
Allowance for Doubtful Accounts XXX

6. Balance Sheet Presentation – Allowance Method
Partial Balance Sheet
Accounts receivable $xxx,xxx
Less: Allowance for
doubtful accounts xxxx
Net accounts receivable $XXX,XXX 6

7. Accounting for Bad Debts: Allowance Method
Bankrupt
Accounting for Bad Debts: Allowance Method
Journal entry to record bad debt write-off in
period determined uncollectible:
Allowance for Doubtful Accounts XXX
Accounts Receivable—Dexter XXX

8. Approaches to the Allowance Method
% of Net Credit Sales
% of Accounts Receivable
Aging Method
Income Statement Approach
Balance Sheet Approach

9. Percentage of Net Credit Sales Method
Example:
Assume prior years’ net credit sales and bad debt
expense is as follows:
Year Net Credit Sales Bad Debts
$1,250,000 $ 26,400
,340, ,350
,200, ,100
,650, ,150
,120, ,700
$7,560,000 $153,700 3

10. Percentage of Net Credit Sales Method
Example:
2012 Net credit sales $2,340,000 (given)
Bad debt % ($153,700/$7,560,000) %
Bad debts expense $ ,800
Journal entry:
Bad Debts Expense ,800
Allowance for Doubtful Accounts ,800 4

11. Percentage of Accounts Receivable Method
Example:
Assume prior years’ ending Accounts Receivable and
bad debts is as follows:
December 31
Year Accounts Receivable Bad Debts
$ 650,000 $ 5,250
, ,230
, ,950
, ,450
, ,450
$4,038,000 $32,330 3

12. Percentage of Accounts Receivable Method
Example:
$32,330 / $4,038,000 = 0.8% ratio of bad debts to the ending accounts receivable
December 31, 2012 Accounts Receivable $865,000
× 0.8%
Credit balance required in Allowance
account after adjustment $6,920 4

13. Percentage of Accounts Receivable Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100:
Credit balance required in allowance account after adjustment $ 6,920
Less: Credit balance in allowance account before adjustment ,100
Amount for bad debt expense entry $ 4,820

14. Percentage of Accounts Receivable Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100:
Journal entry:
Bad Debts Expense ,820
Allowance for Doubtful Accounts ,820
To record estimated bad debts.

15. Percentage of Accounts Receivable Method
The net realizable value of accounts receivable would be determined as follows:
Accounts receivable $xxx,xxx
Less: Allowance for doubtful account ,920
Net realizable value $xxx,xxx

16. Aging Method Estimated Percent Estimated Amount
Category Amount Uncollectible Uncollectible
Current $ 85, % $
Past due:
1–30 days , % ,248
31–60 days , % ,450
61–90 days , % ,400
90+ days , % ,600
Totals $168, $14,554

17. Aging Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Credit balance required in allowance account after adjustment $14,554
Less: Credit balance in allowance account before adjustment (1,230)
Amount for bad debt expense entry $13,324

18. Aging Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Journal entry:
Bad Debts Expense ,324
Allowance for Doubtful Accounts ,324
To record estimated bad debts.

19. Aging Method
The net realizable value of accounts receivable would be determined as follows:
Accounts receivable $xxx,xxx
Less: Allowance for doubtful account 14,554
Net realizable value $xxx,xxx

20. Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a company is collecting (i.e., turning over) its receivables
LO2

21. Accounts Receivable Turnover
Too fast may mean:
credit policies too
stringent; may be
losing sales
Too slow may mean:
credit department
not operating
effectively;
dissatisfied customers

22. Interest-Bearing Promissory Note
Principal
Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2013.
Date: December 13, 2012
Signed:_________
Interest
Maturity
Date
Baker Corporation
LO3 14

23. Interest-Bearing Promissory Note
Maker
Gives a
Note to
Payee

24. Receipt of Interest-Bearing Promissory Note
Journal entry to record the receipt of the note
on December 13, 2012:
Notes Receivable 15,000
Sales Revenue 15,000

25. Interest-Bearing Promissory Note
Adjusting entry to record interest on Dec. 31, 2012:
Interest Receivable 90
Interest Revenue *
*Interest = $15,000 × 12% × 18/360

26. Interest-Bearing Promissory Note
Journal entry to record the collection of the note on March 13, 2013:
Cash ,450
Notes Receivable ,000
Interest Revenue *
Interest Receivable
*15,000 × 12% × 72/360

27. Accelerating the Cash Inflow from Sales
Credit card sales
Discounting notes receivable
LO4

28. Credit Card Sales Competitive necessity Credit card company:
Charges fee
Assumes risk of nonpayment

29. Discounting Notes Receivable
Sell note prior to maturity date for cash
Receive less than face value (i.e., discounted amount)
Can be sold with or without recourse

30. Reasons Companies Invest in Other Companies
Short-term cash excesses
Long-term investing for future cash needs
Exert influence over investee
Obtain control of investee
LO5

31. Investment in a CD Short-Term Investments—CD 100,000 Cash 100,000
Example:
On October 2, 2012, Creston invests $100,000 of excess cash in a 120-day CD. Principal plus 6% due upon investment maturity.
Purchase of investment:
Short-Term Investments—CD ,000
Cash ,000

32. Investment in a CD Year-end adjusting entry: Interest Receivable 1,500
Interest Revenue ,500
Interest (I) = Principal (P) × Rate (R) × Time (T)
$1, = $100, × 6% × 90*/360
*October = 29 days
November = 30 days
December = 31 days
90 days

33. Investment in a CD Upon investment maturity: Cash 102,000
Short-Term Investments—CD ,000
Interest Receivable ,500
Interest Revenue*
*Interest earned in January:
$100,000 × 6% × 30/360 = $500

34. Accounting for Common-Stock Investments
Control
100%
Consolidated
Financial
Statements
No significant
influence 0%
Fair
Value
Method
Significant
influence
50%
Equity
Method
20%
Our
focus
in Appendix

35. Investment in Bonds Bonds of other companies
Intent and ability to hold until maturity
$100,000, 10% bond due ten years

36. Investment in Bonds Example: On 1/1/12, Atlantic buys:
$100,000, 10% face value
Bonds mature in ten years
Interest payable semiannually
Record the purchase of the bonds and receipt of the first interest payment

37. Recording Bond Purchase
Investment in Bonds ,000
Cash ,000
To record purchase of ABC bonds.
$100,000, 10% bond due 2022

38. Recording Receipt of Interest Payment
6/30/12
Cash ($100,000 × 10% × 1/2) ,000
Interest Income ,000
To record interest income on ABC bonds.

39. Recording Bond Sale Cash 99,000 Loss on Sale of Bonds 1,000
7/1/12
Cash 99,000
Loss on Sale of Bonds 1,000
Investment in Bonds ,000
To record sale of ABC bonds.

40. Investment in Stocks Stocks of other companies
Recorded at cost, including any brokerage fees, commissions or other fees paid to acquire the shares

41. Investment in Stocks
Example:
On February 1, 2012, Dexter Corp. pays $50,000 for shares of Stuart common stock plus $1,000 commissions :
Investment in Stuart
Common Stock ,000
Cash ,000
Record the purchase of common stock

42. Recording Receipt of Dividends
Dexter receives $500 cash dividends from Stuart
common stock on March 31, 2012:
Cash
Dividend Income
To record the receipt of dividends

43. Sale of Investment in Stocks
Sale of Investment in Stuart common stock on
May 20, 2012 for $53,000:
Cash ,000
Investment in Stuart
Common Stock ,000
Gain on Sale of Stock ,000
To record the sale of Stuart common stock.

44. Liquid Assets and the Statement of Cash Flows – Indirect Method
Operating Activities
Net income xxx
Increase in accounts receivable –
Decrease in accounts receivable
Increase in notes receivable –
Decrease in notes receivable
Investing Activities
Purchases of held-to-maturity and
available-for-sale securities –
Sales/maturities of held-to-maturity and
available-for-sale securities
Financing Activities
LO6

45. End of Chapter 7